SEC Advised to Allow General Advertising in Rule 506 Offerings

In a January 6, 2012 letter, the Advisory Committee on Small and Emerging Companies advised the Securities and Exchange Commission’s chair, Honorable Mary L. Schapiro, that it should relax or modify existing restrictions on general solicitation and advertising of private placements. They are recommending that fund raising under Rule 506 with its restrictions to only using “accredited investors” and other investor protections are sufficient. They stated that the prohibition against general solicitation and advertising is not necessary and is too prohibitive in allowing companies the ability and access to raise capital under a Reg D Rule 506 offering.The SEC has not taken action yet on this advice; however, it is interesting to think that a private company looking to raise money could potentially use general advertising or solicitation to accredited investors. Would this create a sort of “public offering” of securities under Rule 506? The advisory letter is very brief, but one could see a rule change that allows companies some ability to publicly offer securities, provided they only accredited investors purchase the securities. This goes against the view that existing law and rules do not allow a company to even solicit the sale of securities to someone who is not already an accredited investor. Some clarification would be needed to allow companies and their counsel to navigate any changes, but this could ease things up for start up, emerging, or even steady growth companies that need access to capital. We will have to see what the SEC decides to do with this advice.